There are dozens of business tax deductions in the U.S. tax code covering a litany of subjects and situations regarding everyday operations. One such deduction that's seen significant changes in recent years is the standard mileage tax deduction. Although your employees will likely track their own mileage over the course of a tax year, your role as a small business owner is important in claiming this deduction as well.
What is the IRS' mileage deduction?
Before 2018, if your business required the use of a personal car for business reasons, or if it owned and operated its own fleet of vehicles for business use only, the associated costs of operating those vehicles could be deducted at a reduced rate. That deduction used to stem solely from the employee, but the Tax Cuts and Jobs Act of 2017 (TCJA) introduced changes regarding itemized deductions for certain unreimbursed business expenses, including mileage.
According to the IRS, the deduction used to be aimed at easing the burden of footing the "entire cost of ownership and operation" of a vehicle if used only for business purposes. Now, the stipulations that surround the deduction are far more focused, with lawmakers deciding in 2017 that only self-employed individuals would be eligible to deduct business mileage. Individual taxpayers, however, may deduct mileage traveled for medical appointments and while volunteering for a nonprofit.
Previously, moving expenses in relation to a job were also deductible, but the TCJA made that deduction available only to active-duty military members who are forced to move because of a change in their deployment.
According to the IRS' latest table of standard mileage rates, the mileage rates for 2021 are 56 cents per mile for business, 14 cents per mile for charity and 16 cents per mile for medical or moving.
"The standard mileage rate for business use is based on an annual study of the fixed and variable costs of operating an automobile," according to a statement released by the IRS in December 2019. "The rate for medical and moving purposes is based on the variable costs."
It's important to note that the TCJA is effective only through 2025, at which point Congress will determine whether it should be renewed.
Who tracks an employee's mileage?
As a small business owner, you may be interested in keeping track of your employees' mileage data, but you won't have any reason to do so as it pertains to tax deductions. According to Rafael Alvarez, CEO and founder of ATAX, the burden of tracking and calculating an individual's mileage for tax purposes falls upon the employee, but that doesn't mean the employer is completely out of the picture.
"Traditionally, employers do not get involved in tracking mileage for their employees," he said. However, "there are some employers that, because of the nature of their business, keep track of their employees' mileage using applications that can track the mileage from point A to point B, including the day and time."
Employees who intend to deduct mileage will have to keep detailed records of their travels, with exact totals from point A to point B, and the date of each trip. According to Alvarez, employers that use mileage-tracking apps can provide their employees with a report.
"Employers can provide a report to their employees who are required to visit clients, make deliveries and travel in business-related activities," he said. The report also shows the day, time and mileage traveled.
In most instances, a business owner's decision to track employee mileage data depends on whether the company provides mileage reimbursement. If the employer reimburses employees, the employees will provide mileage information to the employer. However, Alvarez noted that there are apps that are very easy to use in conjunction with a tracker installed in a vehicle. Popular mileage tracking apps include MileIQ, Hurdlr, Stride and Triplog. Other options include more robust GPS fleet tracking applications.
Many taxpayers like to use mileage data from applications such as Google Maps and MapQuest. However, Alvarez warned against doing that, because these sites may not be the most accurate tools for the job.
"From personal experience, I can say that IRS tax auditors do not want to use a mileage log from any of these applications," he said. "The reason is that the mileage listed is an approximation, and the IRS auditor prefers accurate mileage."
How should employers handle mileage deductions?
As a business owner, if you use your car strictly for business purposes, you can deduct vehicle expenses on your tax return. Employees and business owners who use their car for personal and business reasons must split the expenses for a potential deduction.
What is the difference between standard mileage and actual expense deductions?
According to the IRS, there are two methods for determining eligible vehicle expenses. Along with using the aforementioned standard mileage rate, small business owners can determine their vehicle expenses by calculating the following costs:
- Depreciation of the vehicle
- Lease payments
- Gas and oil
- Tires
- Repairs and tune-ups
- Insurance
- Registration fees
Although there are two options for calculating how much to deduct, the IRS does not allow taxpayers to claim both deductions. To maximize how much they can deduct, the taxpayer or small business owner will have to calculate which deduction yields the highest return.
To calculate the deduction based on the standard mileage rate, multiply the total business-related miles traveled by the mileage rate, which is 56 cents per mile for the 2021 tax period. So, if a person traveled 500 miles for business-related needs in the 2021 tax year, their deduction would be $280.
Itemized expense deductions, however, require meticulous recordkeeping; to calculate the deduction, you will have to rely on receipts for the costs mentioned above.
How do you claim mileage deductions?
Prior to the TCJA, taxpayers who filed as employees claimed their mileage on Schedule A using IRS Form 2106, while self-employed individuals filed on Schedule C. Although the TCJA eliminated the mileage tax deduction as an itemized deduction for most taxpayers, self-employed individuals can still claim their mileage on Schedule C at 56 cents per mile for 2021.